COLUMBUS, Ohio -- The desire of investors to keep up with
the
Joneses -- and even get ahead of them -- is the driving force
in the volatility of the stock market, a new study suggests.

Economic researchers at Ohio State University and the
University
of Marlyland tested the classic economic theory that people
pursue
wealth not just to buy more goods, but also to increase their
social status among their peers.

This theory, first published by the famous sociologist Max Weber
in 1905, had never been tested using modern statistical and
computer
methods, said Zhiwu Chen, co-author of the study and assistant
professor of finance at Ohio State's Max M. Fisher College of
Business.

This new study used a computer analysis of U.S. economic data
and New York Stock Exchange data from 1959 to 1991 to show that
Weber had it right.

"Our study suggests that investors, in general, trade
heavily
in order to increase their wealth and their social status

Chen conducted the study with Gurdip Bakshi of the University
of Maryland. Their analysis was published in a recent issue of
The American Economic Review.

Weber's theory, outlined in his 1905 book The Protestant
Ethic
and the Spirit of Capitalism, stated that there is a
"spirit
of capitalism" that drives people to increase their wealth,
in part to enhance their social standing.

The major competing theory is that people seek more wealth
simply
so they can buy more goods -- houses, cars or whatever.

If this competing theory is correct, then changes in the value
of the stock market should be related to changes in consumption
of goods by consumers, Chen said. People would earn more in the
stock market so they could buy more goods.

But the researchers' analysis showed no such connection between
U.S. consumption figures and stock market value.

"If the consumption theory was correct, consumption of
goods
and services in the U.S should be as volatile as the stock
market,"
Chen said. "But that hasn't been true."

How does the search for social status lead to stock market
volatility?
Chen said that investors who are eager to make more money than
their peers will watch the market closely and trade stocks
whenever
they see the slightest opportunity to increase their wealth.
This eagerness to trade in order to increase earnings helps make
the market volatile.

"This leads to a self-reinforcing volatility cycle because
a volatile market means that investors have to make even more
trades to keep ahead of others," Chen said.

The results of the study aren't surprising, Chen said,
especially
since the theory has been around for nearly 100 years. "But
until now it was just a philosophical hypothesis. We were the
first to use real-life data to test the theory."